An Italy/Canada trade war is not a joke but a sign of worse to come

According to apocrypha among economic historians, Canada and Italy only became part of the Group of Seven nations, which was formed in the 1970s to cope with oil crisis, by accident.

French President Valery Giscard d'Estaing began in 1975 with a meeting for leaders of France, Germany, Japan, the UK and US. He then added Italy. Feeling outnumbered, US President Gerald Ford pushed for Canada’s inclusion to bolster the anglophones.

More than four decades later and these two second-tier economies are at the heart of a row that could wreck a centrepiece European trade deal that was billed as displaying multilateral cooperation in the face of Donald Trump’s increasing appetite for a trade war.

Italy’s unholy political alliance of the far-right nationalist Northern League and the anti-establishment Five Star Movement has threatened not to ratify a sweeping European Union trade deal with Canada.

In their joint manifesto, the pair pledged to reject trade deals that would deliver “an excessive weakening of citizens’ rights and inflict damage on fair and sustainable competition in the internal market”.

They are not alone in their concerns as the deal only achieved provisional application in 2016 after negotiators overcome objections by local governments in that other economic superpower, Belgium.

But much of the deal, also known as the Comprehensive Economic and Trade Agreement (CETA), has come into effect and been signed up to by 12 of the 28 member states.

It could be the Italy’s opposition will fade as Belgium’s did, but the point is that it is the first real sign that the contempt that Donald Trump has shown for the international system of trade rules and for multilateral coordination in general has started to ripple outwards.

The Italy/Canada tiff is one example is of a G7 nation taking a leaf out of Trump’s protectionist book. Boris Johnson’s ludicrous proposal that the UK should adopt Trump’s tactics in the Brexit negotiations is another.

a tariff is effectively just another tax on consumers

When the so-called leader of the free world first imposes 25% tariffs on $50bn of imports from another major economy, China, and the follows up by rejecting the communiqué of the G7 heads of state and condemns Canada’s leader as “dishonest and weak” it is clear that rules have changed. Trump has also decided to single out his main economies allies and neighbours — Canada, the European Union and Mexico — for 10%-15% tariffs on aluminium and steel.

Sadly, other economies feel they have no choice but to respond. Canada has responded to the US tariffs on steel and aluminium by imposing billions of dollars’ worth of countermeasures, while Mexico has put duties on food and steel and the EU vowed its own retaliation. China is mulling responding in kind.

While this is a wholly understandable political reaction, it is not necessarily the right course of action. As a tariff is effectively just another tax on consumers, it means that a tariff imposed by the EU on American goods will mean that consumers will pay more for those goods.

Looked at from the other side, American businesses for their part have finally stood up for their customers and pointed out that is exactly what will happen in the US when tariffs are imposed on China, European, Canadian and Mexican imports. A breakdown of the Chinese tariffs shows that they will affect eight key groups of components worth a total of $10.7bn, meaning that manufacturers will face higher input costs they will have to pass on.

Rather than stoking its own opposition to tariffs among its electorate, Mexico, China and the EU should instead stand back and watch as US businesses groups and politicians ramp up the outcry against Trump’s tariffs.

Right now, the imposition of tariffs looks more likely to alter trade routes as exporters in the affected countries find new markets, rather than lead to an overall fall of trade.

But if countries continue down the path of raising tariffs against each other then a trade war where trade declines as a share of GDP seems inevitable. This would then risk a repeat of the Smoot-Hawley tariffs in 1930 that led to a collapse in worth trade volumes from $5.3bn in 1929 to $1.8bn by 1933. Other factors were at play, but the overall impact was to convert the Wall Street Crash into the Great Depression. One of those that retaliated was Canada.

If you think that a 20th century trade war is unlikely in the 21st century, you need only look at Italy.

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